Cash Out refinance on rentals OR Collateral for Commercial Loan?

Question

I am working on a new planned development to build multi-family Condo's. Should I use a cash out refinance on my existing rentals for the down payment on the 1st commercial loan, or should I let the commercial lender use my rentals as collateral for the loan? Below is the breakdown.

New Commercial Loan= $600,000. This money will be used for land acquisition, surveying, engineering, concept plan, blueprints, zoning and building permits, and first 3 unit condo build.

Down Payment= 20% or $120,000

Interest Rate= 4.75%/ 25 Years

Interest only payments for the first 6-12 Months during construction.

I currently own 3 multi family and one single family rental with equity. I would either let the commercial lender use the equity in my properties as collateral for the $120,000 down payment at 4.75% ARM for 25 years, or I could do a cash out refinance at 4.32% 30 year fixed for each property. Each cash out refinance would add about $6,000 -$9,000 for closing costs and fees for each property. The cash out refinances would be at 75% LTV and extend my loan repayment on my rentals. Most of my rentals interest rates are currently 4% to 4.8%.

Looking forward to some good advice from some Bigger Pockets experts!

Evan Polaski · Answer

@Grant Sevek Huntington Bank will not do HELOCs on properties owned in LLC. I have asked, and have Huntington HELOCs on my primary and a personally titled Duplex. My SFRs in LLC they won't touch.

Jaysen Medhurst · Answer

@Grant Sevek, I don't keep a super close eye on HELOCs, but usually a few points above a 30-year mortgage; often variable rate; 75-80% total LTV on investment properties. I don't see where Huntington explicitly has a HELOC product for rentals, but they don't say "only owner-occupied" either. Have you spoken to them?

Grant Sevek · Answer

@Jaysen Medhurst there is a brand new condo development right next to this piece of property with a waiting list. Rent is 2,000 per month for 2br 2ba units. A newer development across the street with homes from 320k to 700k. What interest rates and LTV are you seeing on Helocs right now? I was considering this option. I know Huntington Bank usually has promotions for them..

Jaysen Medhurst · Answer

Okay, @Grant Sevek. I don't know the first thing about your market, but I'm skeptical of $200k units renting for $2k/month. Anyone who can afford a $2k rent can absolutely afford a $200-240k home.Your banker is okay being in 2nd position on the rental properties as a down payment? That doesn't sound like any banker I've ever spoken to (and I work at a bank).That said, if you've got the pieces lined up, then rock and roll. Sell 'em as soon as they're done and start cashing those $100k checks.Lastly, have you considered getting HELOCs on the rentals and using that as a down payment? The fees are much lower than a refi and if the new development doesn't go forward or is delayed for any reason, you're not making payments on any money you haven't used. There's also less risk on your end. If the houses are collateral and the new development goes belly up, you're either going to have to write a $120k check to cover the DP or lose the rentals. With a HELOC, you'd lose that money, but keep the properties, which are (hopefully) covering the payments.

Grant Sevek · Answer

@Jaysen Medhurst I will have a real estate attorney create a HOA and I will sell each unit for 200-240k. If I need to rent them, market rents are $2,000 plus per month. Cost to build will be 100k per unit. Land, surveying, blueprints, concept plan, zoning and building permits, connection fees, etc will cost aprox 200k which will be used from the first loan. Developing this way will allow me to scale out. I will be able to use cash from the sales of the first condo units as down payments to build more, or I will use cash from the sales of existing rentals as down payments. I will be $0 out of pocket. The would have a 2nd position on a few of my rental properties to fund the down payment of the commercial loan. There is a big shortage in reasonably price multi family properties in my area. The ones that are available are over priced and would have high Capex.

Jaysen Medhurst · Answer

A few questions, @Grant Sevek, as I try and understand your plan.Will these be condos that you plan to sell after construction or rentals that you'll hold?At $200k/unit what do you think you will sell/rent them for?Assuming there are further planned phases, what does your overall per-unit cost look like? How will you finance them?How does this compare to purchasing an existing property?I'm not exactly understanding how the bank will use your properties as collateral. If you go that route, you're $0 out of pocket and getting the entire $600k from the bank?

George Pauley · Answer

I agree, those closing costs seem high. I usually approach these types of problems like this. Calculate the total cash return on both options. Now you have 2 numbers that you can compare to each other. Most likely, using the existing properties as collateral will have the highest return. But there is risk associated with putting your existing properties up as collateral. You could lose them. But you will know exactly how much MORE profit you can expect. Which will put you in a better position to evaluate whether the risk is worth the reward.

Grant Sevek · Answer

Ken- Thanks, that is a good idea to use a combination of the two. I am talking with multiple lenders to try and get the closing costs down as well.

Kenneth Mooney · Answer

Grant, any way you can get refinancing costs down? Could it be a combination of the two? You'd hate to increase your interest rate on your current ones.